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US Income Distribution 2007

US Income Distribution 2007

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Striking it Richer:The Evolution of Top Incomes in the United States(Update with 2007 estimates)
Emmanuel Saez
 August 5, 2009
What’s new for 2007?
From 2006 to 2007, average real income per family grew by a solid 3.7percent. Average real income for the top percentile grew faster (6.8 percentgrowth), further increasing the top percentile income share from 22.8 to 23.5percent (Figure 2). Year 2007 is therefore the second highest year on recordsince 1913 almost equalling 1928, the record year when the top percentileshare reached 23.9 percent (Figure 2). Even within the top percentile, thegains from 2006 to 2007 are extremely concentrated. The top .01% (top14,988 US families, making at least $11.5m in 2007) share increased from5.46% in 2006 to 6.04% in 2007 leaving well behind the 1928 peak of 5.04percent (Figure 3). This shows that 2007 was an incredibly good year for thesuper rich.Year 2007 was actually also quite good for the bottom 99 percent of USfamilies as their average income grew by 2.8 percent. This is the best annualincrease since 1998. Real income growth for the bottom 99 percent had beenvery meagre during the Bush expansion starting in 2002. Even including2007—a good year for ordinary US families-the top percentile captured 65percent of total real income growth per family from 2002 to 2007 (Table 1).
What will happen to income concentration next?
 The economic landscape has obviously changed dramatically since 2007which marks the peak of Bush expansion. We know from National Accountstatistics that real incomes per family will fall in 2008 and 2009. Evidencefrom past recessions suggests that, in general, the top percentile incomeshare falls during recessions, as business profits, realized capital gains, andstock option exercises fall faster than average income. Therefore, the mostlikely outcome is that income concentration will fall in 2008 and 2009.Based on the US historical record, falls in income concentration due torecessions are temporary unless drastic policy changes, such as financialregulation or significantly more progressive taxation, are implemented andprevent income concentration from bouncing back. Such policy changes tookplace after the Great Depression during the New Deal and permanentlyreduced income concentration till the 1970s (Figures 2, 3). In contrast, recent
University of California, Department of Economics, 549 Evans Hall #3880, Berkeley, CA94720. This is an updated version of “Striking It Richer: The Evolution of Top Incomes in theUnited States”, Pathways Magazine, Stanford Center for the Study of Poverty and Inequality,Winter 2008, 6-7. Much of the discussion in this note is based on previous work joint withThomas Piketty. All the series described here are available in excel format athttp://elsa.berkeley.edu/~saez/TabFig2007.xls
 
 
 1downturns, such as the 2001 recession, lead to only very temporary drops inincome concentration (Figures 2, 3).
Could we get income distribution data faster?
Distributional statistics used to estimate our series are produced by theStatistics of Income division at the Internal Revenue Service. Those statisticsare extremely high quality and final, but come with a 2-year lag--year 2007statistics were released on August 3, 2009. Timely statistics are central toenlighten the public policy debate, especially distributional statistics at thistime of controversy about large bonuses paid by financial companiesreceiving government aid. As currently done for National Accounts, it shouldbe possible to produce preliminary distributional statistics much earlier. Inparticular, individual tax returns filed before April 15, information returns (suchas W2 and 1099 forms), and requests for filing extensions could be combinedto create preliminary statistics perhaps one year earlier. Furthermore,individual quarterly wage income data gathered by the unemploymentinsurance system could be used systematically to analyze the distribution of wage income even faster.
Text of “Striking it Richer” updated with 2007 estimates
The recent dramatic rise in income inequality in the United States iswell documented. But we know less about which groups are winners andwhich are losers, or how this may have changed over time. Is most of theincome growth being captured by an extremely small income elite? Or is abroader upper middle class profiting? And are capitalists or salariedmanagers and professionals the main winners? I explore these questionswith a uniquely long-term historical view that allows me to place currentdevelopments in deeper context than is typically the case.Efforts at analyzing long-term trends are often hampered by a lack of good data. In the United States, and most other countries, household incomesurveys virtually did not exist prior to 1960. The only data source consistentlyavailable on a long-run basis is tax data. The U.S. government has publisheddetailed statistics on income reported for tax purposes since 1913, when themodern federal income tax started. These statistics report the number of taxpayers and their total income and tax liability for a large number of incomebrackets. Combining these data with population census data and aggregateincome sources, one can estimate the share of total personal incomeaccruing to various upper-income groups, such as the top 10 percent or top 1percent.We define income as the sum of all income components reported ontax returns (wages and salaries, pensions received, profits from businesses,capital income such as dividends, interest, or rents, and realized capitalgains) before individual income taxes. We exclude government transfers suchas Social Security retirement benefits or unemployment compensationbenefits from our income definition. Therefore, our income measure is definedas market income before individual income taxes.
 
 2
Evidence on U.S. top income shares
Figure 1 presents the income share of the top decile from 1917 to 2007in the United States. In 2007, the top decile includes all families with marketincome above $109,600. The overall pattern of the top decile share over thecentury is U-shaped. The share of the top decile is around 45 percent fromthe mid-1920s to 1940. It declines substantially to just above 32.5 percent infour years during World War II and stays fairly stable around 33 percent untilthe 1970s. Such an abrupt decline, concentrated exactly during the war years, cannot easily be reconciled with slow technological changes andsuggests instead that the shock of the war played a key and lasting role inshaping income concentration in the United States. After decades of stabilityin the post-war period, the top decile share has increased dramatically over the last twenty-five years and has now regained its pre-war level. Indeed, thetop decile share in 2007 is equal to 49.7 percent, a level higher than any other year since 1917 and even surpasses 1928, the peak of stock market bubblein the “roaring” 1920s.Figure 2 decomposes the top decile into the top percentile (familieswith income above $398,900 in 2007) and the next 4 percent (families withincome between $155,400 and $398,900 in 2006), and the bottom half of thetop decile (families with income between $109,600 and $155,400 in 2006).Interestingly, most of the fluctuations of the top decile are due to fluctuationswithin the top percentile. The drop in the next two groups during World War IIis far less dramatic, and they recover from the WWII shock relatively quickly.Finally, their shares do not increase much during the recent decades. Incontrast, the top percentile has gone through enormous fluctuations along thecourse of the twentieth century, from about 18 percent before WWI, to a peakto almost 24 percent in the late 1920s, to only about 9 percent during the1960s-1970s, and back to almost 23.5 percent by 2007. Those at the very topof the income distribution therefore play a central role in the evolution of U.S.inequality over the course of the twentieth century.The implications of these fluctuations at the very top can also be seenwhen we examine trends in
real 
income growth per family between the top 1percent and the bottom 99 percent in recent years as illustrated on Table 2.From 1993 to 2007, for example, average real incomes per family grew at a2.2 percent annual rate (implying a growth of 35 percent over the fourteenyear period). However, if one excludes the top 1 percent, average real incomegrowth fall to 1.3 percent per year (implying a growth of 20 percent over thethirteen year period). Top 1 percent incomes grew at a much faster rate of 5.9percent per year (implying a 122 percent growth over the fourteen year period). This implies that top 1 percent incomes captured half of the overalleconomic growth over the period 1993-2007.The 1993–2007 period encompasses, however, a dramatic shift in howthe bottom 99 percent of the income distribution fared. Table 1 nextdistinguishes between the 1993–2000 expansion of the Clintonadministrations and the 2002-2007 expansion of the Bush administrations.During both expansions, the incomes of the top 1 percent grew extremelyquickly at an annual rate over 10.3 and 10.1 percent respectively. However,while the bottom 99 percent of incomes grew at a solid pace of 2.7 percent

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